Shielding food manufacturers from downturn

Posted by Daniel Palmer on 7th July 2009

Food manufacturers around the world have faced difficulty as supermarkets reduce inventory levels in the wake of a global recession, with volumes falling as a result. Sales, have, however, remained robust thanks to price hikes and the “cocooning” trend. And, despite the pressure to reduce costs, now is not the time to be cutting back on innovation and marketing expenditure, according to a Nielsen analyst.

Nielsen research from previous recessions has highlighted that companies that maintain investment in their brands during the darkest days reap the greatest rewards when the economy recovers. As a result, businesses must look to other ways to cut costs.

Mike Fridholm, V.P. of Client Consulting at The Nielsen Company, said in the latest edition of Nielsen Insights that changes to packaging size – a potential option for many food manufacturers – are fraught with danger.

Woman at supermarket - nutrition label

“Consumers are extremely savvy-they notice changes to products they care about and are increasingly vocal, particularly on social networks, blogs, and on-line discussion boards,” he explained. “All the attention given these days to the media “groundswell”- and the high-profile nature of products getting lauded or attacked on YouTube, Twitter or other consumer-generated media – ups the ante for manufacturers to link changes to packaging or product to more substantial benefits as they pursue this strategy.”

Mr Fridholm noted that there were four cost-reduction ideas often analysed by food manufacturers, all which have a downside if not carried out effectively. The first option was to downsize – a move fraught with danger as brand loyal customers will notice the change. With this in mind, to limit the risk manufacturers must outline a benefit of the move. If the move is not supported with adequate reasoning then the company is liable to a backlash – as seen by Foster’s when they reduced the size of Cascade.

According to Nielsen, successful downsizing is most likely to occur when the manufacturer is a significant market share leader within the category, the downsizing includes a large number of SKUs within the category so as not to penalise a small subset of the competitive frame of reference, the percentage package size reduction is less than 12% and the categories have highly expandable consumption. Research also suggests that downsizing is preferable to price hikes among consumers.

An alternative is to upsize – which is, not surprisingly, the preferred option of shoppers. However, manufacturers must be careful not to pass the price threshold of consumers.

“Clearly, consumers like large economy packs,” Mr Fridholm said. “And for manufacturers, their appeal lies in economies of scale and more efficient use of plant capacity. Not to mention that consumers buying large quantities can stay out of the competitive shopping cycle for a longer period of time. Economy or bonus packs can be extremely well received, particularly when they add benefits beyond a better price per unit.”

However, caution must be displayed as packages which are inconvenient and/or do not fit properly on retail shelves are not going to boost sales.

The other two options are to change the packaging materials or change the formulation of the product.

Altering the packaging materials can be a margin-enhancing move but it must be functional and take into account the increased focus consumers are putting on the sustainability of packaging. A recent study has discovered that the impact of sustainable packaging on the brand loyalty of Australian shoppers is set to soar.

Changing the ingredient formulation must be done with great care. Consumers become very attached to a brand and hearing of an alteration to the way a product is produced will cause concern. Ultimately, it must at least maintain the same level of quality, as consumers will be very attentive to changes and anything negative will be magnified.

Cadbury is one company to commit to a couple of cost-reduction strategies, with a downsize they believe to be justified by an alteration to packaging. The packaging is resealable and utilises more recyclable materials, while the chocolate block can now be broken without crumbs. Whether these changes are enough to justify the downsizing will be monitored with interest when they next report sales figures from Australia.

“In the end, it is all about the consumer seeking more value for their currently limited dollar… It begins with a product satisfying a need and takes into account the alternatives available to satisfy that need. Cost-saving product innovations, when done in isolation, tend to lead to declines in perceived value and consumer appeal. Manufacturers need to know their consumers and ensure that cost-saving changes are still providing additional positive auxiliary benefits,” Mr Fridholm concluded.